AS MARKETS GET ROUTED, GO BARGAIN HUNTING!

By Ruma Dubey

Take a look at the stocks which have hit a new 52-week low today. ONGC, Vijaya Bank, Cairn India, Vedanta, Tata Motors, Tata Power, Hindalco, Adani Power, EID parry, VST Industries, NTPC, Gail, Just Dial, Lakshmi Machine and many more. Some 33 stocks in the BSE-500 have hit new lows. Midcap stocks hitting new low exceed the large cap. Most of the names appearing in the list have two points in common – either they have run up too much ahead of their valuations or they are pure operator stocks with little fundamentals to talk about. Currently, out of the total of 2578 stocks being traded, 1903 of 74% of the stocks are on the decline and 594 stocks are up, which is 23% of total stocks traded.

So we should actually thank this rout in the markets today – at least the chaff is getting separated from the grain.

One need not be a stock market specialist to say that bears seem to holding the markets in a tight grip. Moods remain despondent with no major positive trigger at sight. Yet, even when there is a sense of hopelessness on Dalal Street, many are on the prowl, looking for bargains. Call them scavengers or whatever, they buy every time there is a carnage; they scavenge through the rubble, looking for a good bargain.  When stocks hit new 52-week lows or life time new lows, many rush in to accumulate the stocks. And their trading strategy could not have been more perfect; after all this is precisely the mantra of Warren Buffett – buy when all are selling and sell when all are buying.

That does make a lot of investment sense but the question is – when to buy? You may have bought a large chunk of shares after it had hit a new low, having the patience to sit on it for some years till moods and markets improve. But what do you do when the stock continues to fall, hitting new life time lows? It is good to catch a falling knife but how do you ensure that you do not get hurt?

A few points to keep in mind when you catch such sharp falling knives:

• Buy only into sound companies, with no corporate governance issues. Or else, more fall is certain as more and more skeletons will tumble out of the cupboard.
• Do not buy companies hitting new lows which have huge debt and major liquidity issues. The JP group, Lanco, DLF, Alok Inds are some of the very high debt companies, which is affecting their financial performance.
• Pay attention to the sector. Realty sector is in the doldrums and there is no hope of any immediate revival. Thus stocks in this sector could only fall further. Also remember – majority stocks in this sector have corporate governance and high debt issues.
• Look at the macro factors around. In today’s scenario where the rupee is depreciating against the dollar, companies with high import content and sitting on major forex loans will have a tough time.
• To buy into low stocks is a good idea but not those which are in a crisis mode, like say Jyoti Structures or Electrosteel Castings. On the other hand, if it is a veritable blue-chaip like Nestle, the crisis of Maggi was perfect time to buy as such huge conglomerates get over such crisis. They simply cannot afford to go down! So just the crisis and the company undergoing it.
• When blue chips hit rock bottom, buy them. Today, no one is talking about fundamentals at all but this trait never goes out of fashion. Once markets improve, fundamentals will once again become a priority.
• Sectors like infra, capital goods are down in the dumps. But there are solid stocks in this sector; keep an eye on those stocks as these sectors would be the first to bounce back when there is even a small sign of growth picking up. L&T, Thermax, Crompton Greaves are few very strong companies.
• The right time to go bottom fishing is when markets show a few days of higher closes or even if it shows consistent weekly higher close.
• Be like this investor– Ashalata Maheshwari. Buy quality, high dividend paying stocks and be a long term investor. Then such vagaries and falling knives will not hurt.
• Buy blindly into stocks mentioned in our Stock Recommendation section, you will never go wrong. Jamna Auto, Cheviot, Uflex, Harita Seating, Zydus Wellness, are just a few of them.
• Simple rule of investing – stick to companies whose business you can understand and if they are into exotic forex instruments, steer clear. Balance sheet is the guiding star, follow and understand it, you will never go wrong.

Bottomline – catching a falling knife is dangerous so be careful to avoid getting blood on your hands.